Credit: Shutterstock photoInvestors seeking steady returns may allocate their assets in stocks with favorable liquidity positions. Liquidity often indicates whether the company is financially strong or not. It is a measure of a company's capability of meeting its debt obligations by converting its assets into liquid cash and equivalents. However, one should be careful about investing in a stock with a high liquidity level as it may also indicate that the company is failing to utilize its assets efficiently. Therefore, in addition to the liquidity level, an investor may also consider the efficiency of the company before investing in the stock.
Key Liquidity Ratios
Liquidity ratios - current, quick and cash ratios - are considered as popular indicators of liquidity levels. Favorable liquidity ratios may help an investor to identify a company's capability of converting its assets to meet its debt obligations. While current ratio or working capital ratio seeks to measure a company's potential to meet its short- as well as long-term debt obligations, a company's quick ratio or acid-test ratio or quick assets ratio indicates its capability of meeting only its short-term debt obligations. This is why current ratio takes current assets relative to current liabilities into consideration, while quick ratio is a ratio of current assets excluding inventory to current liabilities.
On the other hand, the most conservative of the liquidity ratios, cash ratio aims to measure a company's potential to pay its current debt obligations by converting its most liquid assets. In order to achieve its objective, cash ratio only considers cash and cash equivalents relative to current liabilities. Though a higher value of these ratios may indicate that the company has a good financial position, significantly high values may signal that the company is inefficiently utilizing its assets. Hence, companies with liquidity ratios between 1 and 3 are considered to have favorable liquid levels.
Screening Parameters
Besides considering ideal ranges of liquidity ratios, we have added asset utilization to our screening parameters with an objective to screen the efficient stocks only. Asset utilization is a ratio of total sales over the past 12 months to the last four-quarter average of total assets. It is considered to be one of the popular means of identifying efficient companies.
In order to make our strategy more profitable, we have added our proprietary Growth Style Score to the screen with an objective to ensure that these liquid and efficient stocks have solid growth potential too.
Current Ratio, Quick Ratio and Cash Ratio between 1 and 3
(While liquidity ratios of greater than 1 are desirable, significantly high ratios may indicate inefficiency.)
Asset utilization greater than industry average
(Higher asset utilization than the industry average indicates a company's efficiency.)
Zacks Rank equal to or better than #2
(Only Strong Buy and Buy rated stocks can get through.)
Growth Style Score equal to or better than B
(Back-tested results show that stocks with a Growth Style Score of 'A' or 'B' when combined with a Zacks Rank #1 or #2 handily beat other stocks.)
Just these few criteria have narrowed down the universe of over 7,700stocks to only 21.
Here are five stocks from the list:
ShoreTel, Inc.SHOR is a leading provider of enterprise IP telephony solutions. The company has a Growth Style Score of 'B' and an average four-quarter positive earnings surprise of 72.9%. It carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here .
MSG Networks Inc.MSGN is engaged in production and content development for sports and entertainment networks. This Zacks Rank #2 (Buy) company has a Growth Style Score of 'B' and an average four-quarter positive earnings surprise of 12.1%.
Exelon CorporationEXC is engaged principally in the production, purchase, transmission, distribution and sale of electricity. This Zacks Rank #2 company has a Growth Style Score of 'B' and an average four-quarter positive earnings surprise of 9.9%.
FactSet Research Systems Inc.FDS supplies global economic and financial data to analysts, investment bankers and other financial professionals. This Zacks Rank #2 company has a Growth Style Score of 'B' and an average four-quarter positive earnings surprise of 1.9%.
Progress Software CorporationPRGS is a global supplier of application development, deployment and management technology, Internet and intranet. This Zacks Rank #2 company has a Growth Style Score of 'A' and an average four-quarter positive earnings surprise of 4.3%.
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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks' portfolios and strategies are available at:https://www.zacks.com/performance.
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Exelon Corporation (EXC): Free Stock Analysis Report
FactSet Research Systems Inc. (FDS): Free Stock Analysis Report
ShoreTel, Inc. (SHOR): Free Stock Analysis Report
Progress Software Corporation (PRGS): Free Stock Analysis Report
MSG Networks Inc. (MSGN): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
